LETTERS SECTION When does the Central Bank intervene the foreign exchange market? Estimating a time-varying threshold intervention function Erwin Hansen 1 | Marco Morales 2 1 Departamento de Administración, Facultad de Economía y Negocios, Universidad de Chile, Santiago, Chile 2 Departamento de Economía, Facultad de Economía y Empresa, Universidad Diego Portales, Santiago, Chile Correspondence Marco Morales, Departamento de Economía, Facultad de Economía y Empresa, Universidad Diego Portales, Santiago, Chile. Email: marco.morales@udp.cl Funding information Fondecyt, Grant/Award Number: 11150693 Abstract Foreign exchange interventions as an (implicit) policy instru- ment to stabilize prices in emerging economies with infla- tion targeting (IT) have gain attention among scholars and policy makers recently. Yet, it is not fully clear when and under which circumstances these interventions occur. In this article, we shed light on this topic by proposing an empirical methodology to identify the (unobservable) threshold function that defines the timing of interventions by Central Banks. We apply this methodology to Chile, a market-oriented economy that despite combining an IT scheme and a free-floating forex regime officially, has expe- rienced occasional interventions. KEYWORDS Chile, emerging market, FX intervention, inflation targeting, threshold GARCH model JEL CLASSIFICATION F3; E52; E58 1 | INTRODUCTION The use of sterilized foreign exchange interventions as an (implicit) policy instrument to stabilize inflation in emerging economies with inflation targeting (IT) has gain attention recently among scholars and policy makers (see Airaudo, Buffie, & Zanna, 2016; Aizenman, Hutchison, & Noy, 2011; Nordstrom et al., 2009; Ostry, Ghosh, & Chamon, 2012). Until recently there was a consensus that in order for an IT scheme to be successful the exchange rate should fluctu- ate freely while the policy rate stabilizes inflation (Mishkin, 2000). The recent financial crisis, however, showed that prices stability is a necessary though not a sufficient condition to achieve sustainable and stable economic growth (Ostry et al., 2012), and in this regard, the exchange rate plays a role in achieving this goal. Aizenman et al. (2011) Received: 14 May 2019 Revised: 17 August 2019 Accepted: 23 September 2019 DOI: 10.1111/irfi.12288 © 2019 International Review of Finance Ltd. 2019 International Review of Finance. 2019;1–11. wileyonlinelibrary.com/journal/irfi 1